Focus - Water brands look to build on Eastern European growth

Having overtaken carbonated soft drinks in volume terms last year, the bottled water category in Eastern Europe can look forward to further growth over the next five years. But, writes Rob Walker, industry analyst for non-alcoholic drinks at Euromonitor International, while rising incomes and changing aspirations offer significant opportunities for bottled water brands, the region's demographics are not as favourable as other emerging markets.

Last year was a significant one in the evolution of the bottled water sector in Eastern Europe, as volume sales exceeded those of carbonated soft drinks (CSDs) for the first time. In total, some 12.8bn litres of bottled water were consumed, according to Euromonitor International, compared with 12.6bn litres of carbonates.

Moreover, having edged ahead bottled water is forecast to continue outperforming carbonates over the next five years, with the region's total consumption projected to reach 18.6bn litres by 2012, by which time consumption will be 23% higher than that for carbonates. And the forecasts for per capita consumption are even more spectacular, with consumption per person forecast to rise to 56.7 litres by 2012 from 38.5 litres in 2007.

The swelling bank accounts of a new urban generation, fuelled by the region's stellar economic expansion, are central to the strong performance. Indeed, it would be a mistake to explain away the growth of bottled water simply as the result of a newfound awareness of health and hydration benefits. Health issues are certainly relevant, but rather they are relevant as an integral component of an evolving consumer culture increasingly craving Western-style products. Equally important to this new consumerism are issues of fashion and aspiration. In short, the fact that a still bottled water brand might be better for your health than a cola carbonate is a bonus, not necessarily a driver of the purchase.

Russia, which has an increasingly demanding 25-35 age band population, spearheads the region's bottled water market, with consumption at 3.1bn litres in 2007, ahead of Poland, Ukraine, Romania and the Czech Republic on 2.2bn, 1.7bn, 1.1bn and 1.0bn litres respectively.

According to Euromonitor International, of these billion-litre markets, the Ukraine showed the most dynamic growth in 2007, with volume up 15.7% over 2006. In common with a number of Eastern European markets, the Ukraine has a strong sparkling water consumption tradition, with category volume accounting for 78.5% of its total bottled water market in 2007.

In fact, Eastern Europe accounted for six of the world's top 13 carbonated bottled water markets in 2007, which is in itself a measure of an entrenched sparkling water consumption culture. However, it is the Ukraine's still bottled category that is showing the fastest growth - 26.6% versus 13.6% in 2007 - and this trend is reflected across the region, with still bottled water brands growing on average at twice the speed of carbonated bottled water brands.

Moreover, there is limited evidence to suggest that still bottled water is cannibalising volume from carbonated bottled water. In fact, the latter category is continuing to show robust growth. Instead, still water is raising the dynamism and competitiveness of the bottled water market as a whole. From an industry perspective, investment is likely to be mostly in the still bottled water category over the short through medium term, reflecting stronger value-enhancing growth opportunities.

For example, according to Euromonitor International, consumption of still bottled water will more than double in both Russia and the Ukraine over the next five years, and the region as a whole is projected to post growth of 66.4%. In a category that is proving receptive to innovation and intelligent branding, this represents volume effectively up for grabs to the best and most creative players.

Financial turbulence in the US and Western Europe will impact negatively on Eastern Europe in 2008, with the region's GDP growth unlikely to exceed 6%. However, Eastern Europe is now more able to withstand negative shocks than a decade ago and domestic demand in most of the region's markets is forecast to continue its upward curve even in the context of a global economic slowdown.

But the region's demographics are less attractive, and over the longer term could exert downward pressure on growth. Specifically, the under-15 population is undersized in most countries, and as a result there is a danger that the region could get old before it gets rich.

In Russia and Ukraine, for example, the under-15 age band accounts for 14.2% and 14.1% of the total population respectively compared with 30.8% in India and 30.6% in Mexico, two of the world's most attractive emerging markets. The demographic picture in the Czech Republic, Hungary, Romania and Poland is not much better. For the bottled water industry, and for the drinks industry as a whole, this means that the window of opportunity might not be open for long. Strategically, it will be important to get consumers accustomed to bottled still water so that they continue to consume the product as they age. Currently, branded still water is not a common drink for older generations.

Having outperformed carbonates last year, Eastern Europe's bottled water industry should now seize the agenda in terms of brand and pack mix segmentation. According to Euromonitor International, flavoured and functional formats are bit players, accounting regionally for 4.4% and 0.8% of total bottled water volume respectively in 2007, but they have potential to develop as important value-added niche categories.

Equally, targeted innovation in functional water could drive demand among the region's older consumers. Euromonitor International also identifies high-volume bulk presentations as an attractive niche growth opportunity for the medium term, especially as the middle-class consumption base expands in urban areas, and as concerns grow over the quality of tap water. Savvy investment in distribution infrastructure, a major obstacle to stronger growth across the bottled water categories, could yield attractive returns in this category. Crucially, the industry needs to maximise its opportunities while the windows remain open.